It seems simple enough: You’ve qualified for a mortgage on a $300,000 home, so now every home in that price range is yours for the choosing, right?
It seems paradoxical, but many homebuyers who have been preapproved or prequalified for a mortgage are shocked to find out that they still don’t qualify for a home that supposedly has the same value as the mortgage they’ve qualified for. How is this possible?
In truth, monthly payments vary widely between properties of the same value, and that variance leads to drastic changes in qualifying prices. The explanation for these differences in payment can be explained tax and insurance premium variables, but even more so by three major assumptions made by lenders when qualifying homebuyers for a mortgage.
So what assumptions can you expect a lender to make about the home you’re buying when prequalifying you for a mortgage?
Mortgage lenders are assuming that you’re in the market for a newer home, or one built within the last 25 years. That won’t always be the case as, depending on what region you’re looking at, sometimes there are simply more older homes than new developments.
Why should this change the monthly payment on the home, compared to a newer model of the same value?
Simply put, concerns regarding the age of the house result in higher insurance premiums. An older $300,000 home is more likely to be in need of repairs, such as a new roof or new plumbing facilities. In some parts of the country, older homes might not have the most up-to-date adaptations for combating the elements, such as hurricane protection for windows in Florida.
This can lead to monthly payments that are $200 higher for older homes, as well as dropping $40,000 from your qualifying price. You might have qualified for a $300,000 new home in ideal circumstances, but only a $260,000 home of a significant age.
A handy trick for those looking to buy a home at a discounted rate may look to those being sold by banks, rather than individual owners. That’s a good idea, in theory, however ownership by institutions rather than people can end up costing more per month.
A homeowner can claim a homestead exemption on their property, which dramatically reduces the taxes on a home. Banks can’t do the same thing, as the measure was created to help protect individuals. The result is that properties sold by banks include higher taxes that—you guessed it—also raise the monthly payment.
A $300,000 property without homestead protection may result in a $250-per-month increase, while lowering your qualifying price to $250,000.
Many large housing developments require membership in a Homeowners Association in order for the buyer to purchase a home in the area. The fees involved with such an association also raise your monthly payment accordingly.
That could mean an additional $250-per-month on your mortgage payment, as well as another lowering your qualifying price down to $250,000.
Also keep in mind that these three factors aren’t necessarily limited to one-per-household. In a worst-case-scenario, you may fall for a home that’s old, lies in a Homeowners Association community, AND is being offered by a bank. All three qualities contribute to a much higher monthly payment, as well as dragging your qualifying price down terribly. Your $300,000 qualifying price, adjusted for all three factors, is now worth half of that.
That’s a big change in the quality of the home you qualify for. So how do you avoid it happening to you?
A benchmark is the actual monthly payment on the home. Principal and interest remain fixed across all homes you may choose, but the aforementioned characteristics may change the price dramatically. Make sure to have your lender run the numbers to make sure that the home you want falls within your target benchmark, and always make sure to consider these factors before prequalifying or getting pre-approved for a mortgage!
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